Eric Zwick, Assistant Professor of Finance
Summary: While a large literature examines the effect of fiscal stimulus programs in general, few examine policies that directly target the residential housing market. In this paper, we use the First-Time Homebuyer Credit, a temporary tax credit targeted towards marginal homebuyers, and a difference-in-differences research design to ask how do temporary subsidies affect homebuying decisions and the housing market more broadly? We combine data from administrative tax records with transaction deeds data to measure program exposure, estimate the effect of the policy, and explore the mechanism of the observed response in detail.
We present four main findings. First, the policy proved effective at spurring home sales. We estimate the FTHC raised home sales during the policy period by 163 to 224 thousand within sample and 397 to 546 thousand nationally. Second, we find little evidence that the surge in home sales induced by the credit reversed immediately following the policy period. Instead, demand appears to come from several years in the future. Third, the policy response came primarily in the form of existing home sales, implying the direct stimulative effects of the program were small ($4.5 to $5.2 billion). Fourth, we present evidence that the program likely accelerated the process of reallocation from low-value sellers to high-value buyers, and the health of the housing market, as reflected in house prices, improved accordingly. A back-of-the-envelope calculation suggests the consumption response to the increase in house prices was much larger than the policy’s direct stimulus effect.